NIELDS, District Judge
This suit was brought by minority stockholders of the St. Louis Coke Iron Corporation (hereinafter referred to as the Coke Corporation) against that company and St. Louis Gas Coke Corporation (hereinafter referred to as the Gas Corporation). All of the original plaintiffs have withdrawn, and the case is being prosecuted by other minority stockholders who have intervened and adopted the allegations of the bill of complaint as their own.
The present plaintiffs are holders of less than 2 per cent. of the common stock of the Coke Corporation. That company was in financial difficulties. Harley L. Clarke, president of Utilities Power Light Corporation, acquired a large majority of the outstanding preferred and common stock of the Coke Corporation. He organized the Gas Corporation for the express purpose of taking over the assets and property of the Coke Corporation. Afterwards the Coke Corporation elected a new board of directors. That board authorized the sale of all of its property and assets to the Gas Corporation. This sale was approved by 99 per cent. of the owners of the first preferred stock; the only stock then having voting power. Provision was made for payment to common stockholders of $20 a share for their stock.
Plaintiffs attack the sale, and particularly the value of $20 a share placed upon the common stock. They allege that the managing directors of the Coke Corporation at the time of the sale were under the dominance of, and held their office by appointment and selection of, Utilities Power Light Corporation, majority stockholder of the Coke Corporation, and that the transfer of the assets of the Coke Corporation to the Gas Corporation was in violation of the General Corporation Law of Delaware and constituted a fraud upon the minority stockholders.
Further, the bill alleges that on the basis of fair market value at the time of the transfer the outstanding shares of common stock of the Coke Corporation had a book value "of about One hundred and Ninety Dollars ($190) a share," and that "capitalizing the value of the outstanding common stock of the Iron [Coke] Corporation on the basis of twenty times annual earnings thereon (which is a conservative valuation basis for common stock of a public utility corporation such as the Iron Corporation) and without considering the vast potentialities of the plant and assets of said Iron Corporation and the community which it served in the public utility field for increased earnings in succeeding years, said common stock of the Iron Corporation had a reasonable value of about Five Hundred Dollars ($500.00) a share at the time of said transfer and conveyance of the plant and assets of the Iron Corporation to the Gas Corporation."
Defendants reply that the sale was in accordance with law, without fraud, and for a fair consideration.
A brief recital of the history of the Coke Corporation and of the circumstances under which the Gas Corporation became the purchaser of its assets is necessary. In April, 1917, the predecessor of the Coke Corporation, called St. Louis Coke Chemical Company, was organized. During the years 1917 to 1920 it acquired land in Madison county, Ill., and erected thereon its by-product coke oven and blast furnace plant. Operations were started in February, 1921. By June, 1921, its capital outlays and obligations consisted of $6,404,000 8 per cent. first mortgage gold bonds; $2,076,600 8 per cent. debenture bonds; $5,275,000 8 per cent. cumulative preferred stock of the par value of $100 per share; and 200,000 shares of common stock of the par value of $5 per share, a total of $14,755,600. From its organization in 1917 until April, 1923, the operations of the company were conducted at a loss. In April, 1923, it was reorganized. Under the reorganization, its obligations and capital outlays, then aggregating $17,427,365, were converted into securities of St. Louis Coke Iron Company, a Maine corporation, as follows: $6,488,000 6 per cent. first mortgage bonds; $3,099,200 7 per cent. cumulative preferred stock of the par value of $100 per share; and 95,703 shares of common stock of the par value of $5 per share; and $160,000 bond interest, aggregating $10,225,715. For the year 1923 the reorganized company made a profit of $413,323.59. By September, 1924, the company was again in financial difficulties, and on September 7, 1924, on the petition of creditors and stockholders, a receiver was appointed in Illinois. The receiver operated the company until November, 1925, when its assets were sold to a committee of creditors and bondholders. These assets were transferred by the committee to a new corporation then organized under the laws of Delaware under the name of Midland Coke Iron Corporation, which afterwards, by change of name became the defendant St. Louis Coke Iron Corporation. For the assets thus acquired the Coke Corporation issued the following securities: 68,188 shares of first preferred stock of the par value of $100 per share; 10,224 shares of second preferred stock of the par value of $100 per share; 51,133 shares of common stock of the par value of $5 per share — a total capital of $8,096,865. During the first year of its existence this company showed fair earnings. By the end of 1926, however, its current liabilities exceeded its current assets by approximately $500,000. During the first three months of 1927 the Coke Corporation again showed fair earnings, but during the next three months it suffered substantial losses. At the time of the sale to the defendant Gas Corporation, the Coke Corporation's current liabilities exceeded its current assets by approximately $600,000. In June, 1927, it was in financial distress. Notes in the aggregate amount of $2,700,000 were falling due within a few days. There was no cash with which to pay them, and it was known that no further extension would be granted. It could not hope to finance it-self by the sale of additional securities. There was little cash, and the auditor's report and treasurer's report showed that to continue operations over a further period of a few months in 1927 would need at least $732,000 additional cash.
Realizing the impending financial situation, certain large stockholders brought the matter to the attention of Harley L. Clarke, president of Utilities Power Light Corporation, in the fall of 1926, and sought to interest him in its reorganization. After some investigation, Clarke became interested. Active negotiations started in March, 1927. Utilities Power Light Corporation was a large public utility holding company. At the time it owned a controlling interest in Laclede Gas Light Company and Laclede Power Light Company, two utility companies operating in St. Louis, Mo., just across the river from the plant of the Coke Corporation. These two companies were very large users of gas and electric current. The Coke Corporation for many years had been trying to sell its surplus gas and electric current to the Laclede Companies, but without success.
The Coke Corporation had been able to sell only a very small quantity of the gas it produced. The bulk of it was bled into the air and was a total loss. Clarke, however, was in a position to negotiate contracts with the Laclede Companies for the purchase by those companies of the surplus electric current and surplus gas produced by the Gas Corporation. Long-term contracts were negotiated. Obviously these contracts would be a source of considerable revenue. It was estimated the Gas Corporation would profit thereby to the extent of $1,000,000 a year.
As another step in the contemplated reorganization, Clarke caused an investigation to be made with respect to the value and prospective earnings of the Coke Corporation's plant and assets. He employed the well-known engineering firm of Stone Webster. That firm fixed the replacement value as of April, 1927, less depreciation, at approximately $18,000,000. About the same time Clarke, on behalf of the Utilities Corporation, also employed H. A. Brassert Co., a nationally known firm of engineers in estimating earnings of a business of the character of the Coke Corporation. Their investigation was carried on for several months before June, 1927. In their report they stated, "We estimate a possible profit after selling and administration expense when in full operation of $1,880,000 per year." This estimated profit was based upon due banks in the sum of $2,700,000 which it could not pay and which could not be extended. If it was to continue operations, its immediate needs called for additional cash in at least the sum of $732,000. It had suffered a substantial net loss during the three months immediately preceding the sale. The record fully supports the statement in defendant's brief "that the figure of $20 per share for the common stock, four times par, was more than generous and that the consideration paid by the Gas Corporation for the assets of the Coke Corporation was a fair consideration."
The fallacy of plaintiff's case lies in the contention that the value of the common stock of the Coke Corporation should be determined, not upon the value of the assets of that corporation at the time of the sale and reorganization, but upon the value of such assets at that time, plus the value imparted to those assets by Mr. Clarke and the Utilities Corporation in refinancing and taking over the management of the corporation, plus the value of the two contracts to be obtained by the Gas Corporation with the Laclede Companies for the sale of surplus gas and electrical energy which the Coke Corporation theretofore had never been able to sell, and from which contracts the profits to the Gas Corporation were estimated at $1,000,000 a year, plus the profit to be realized by the Gas Corporation from a 100 per cent. operation of its plant and the sale of all pig iron produced at the price of $20 a ton, plus the benefit to be derived from the furnishing to the Gas Corporation by the Utilities Corporation of working capital in the sum of $500,000. The statement of such a proposition is its sufficient answer. That such prospective earnings were founded only on hopes and expectations is demonstrated by the record.
It was but a short time before the Gas Corporation was again in financial difficulties and placed in the hands of a receiver. It should also be noted that there is no proof of any fraud or misrepresentation on the part of Clarke or the Utilities Corporation or that either made a dollar profit out of the transaction. On the other hand, the un-contradicted testimony of Clarke is, "What the Utilities Light Power Corporation got out of it was a loss of approximately $600,000 plus the privilege of loaning the company about a million dollars from the time of its acquisition."
This opinion contains a statement of the essential facts and of the law applicable thereto in conformity with Equity Rule 70 1/2 (28 USCA § 723).
The bill of complaint and petitions of intervention must be dismissed.